Will the TPP Stop Japan’s Currency Manipulation?

August 16th, 2016

The answer is a resounding “no.” The Trans-Pacific Partnership Agreement will not stop Japan’s currency manipulation or that of any other partner country because TPP has no provisions regarding currency manipulation misalignment in its text. The problem of currency manipulation is similar to the U. S. budget deficit that keeps being kicked down the road by one Congress after another.

In this case, it is negotiators of the U. S. Trade Representative’s office who have ignored the explicit instructions of Congress with regard to handling the problem of currency manipulation in one trade agreement after another. Despite explicit Congressional instruction in the Trade Promotion Authority Act of 2015, there is no currency provision within the TPP itself.

What is currency manipulation? According to Wikipedia, currency manipulation is “a monetary policy operation. It occurs when a government or central bank buys or sells foreign currency in exchange for their own domestic currency, generally with the intention of influencing the exchange rate.” Simply put, currency manipulation is the devaluation of a country’s own currency to make their exports cheaper and imports more expensive. In practice, foreign governments buy U. S. dollars to reduce the value of their currency to make their goods cheaper than U. S. goods.

Why is it a problem? According to Michael Stumo, CEO of the Coalition for a Prosperous America, “Foreign currency manipulation is trade cheating because it is both an illegal tariff and a subsidy. The U. S. economy cannot produce jobs and wealth without addressing this problem.” Former Secretary of the Treasury, Paul Volcker, explained, ‘In five minutes, exchange rates can wipe out what it took trade negotiators ten years to accomplish.”

The Peterson Institute Policy Brief of December 2012, “Currency Manipulation in the US Economy and the Global Economic Order” states, “More than 20 countries have increased their aggregate foreign exchange reserves and other official foreign assets by an annual average of nearly $1 trillion in recent years. This buildup of official assets—mainly through intervention in the foreign exchange markets—keeps the currencies of the interveners substantially undervalued, thus boosting their international competitiveness and trade surpluses. The corresponding trade deficits are spread around the world, but the largest share of the loss centers on the United States, whose trade deficit has increased by $200 billion to $500 billion per year as a result. The United States has lost 1 million to 5 million jobs due to this foreign currency manipulation.”

Why hasn’t currency manipulation been addressed in past agreements? A recent white paper issued by the Coalition for a Prosperous America explains:

“Since December 1945, currency manipulation has been prohibited under the rules of the International Monetary Fund. Article 4, Section 1 (iii) of the IMF Articles obliges members to: “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members….” This obligation is designed in part to serve one of the fundamental objectives set forth In IMF Article 1:  the expansion and balanced growth of international trade.

The framers of the post-World War II international system understood that imbalanced trade was mercantilism and sought a monetary system that would avoid one-sided trade results…One country, the United States, has run trade deficits for more than 40 years and has amassed more than $17 trillion in foreign debt. By no stretch of the imagination can this be the sort of ‘balanced growth of international trade” that the IMF rules are supposed to foster.’ ”

Thus, the IMF has had the authority to enforce Article 4 obligations for over 70 years, but in practice, it has only held regular forums “to persuade key members to adjust their policies…The use of mere moral persuasion has failed to produce meaningful results, rendering the IMF increasingly irrelevant. Earlier this year the Congress directed U.S. negotiators to seek to put teeth into the IMF obligations. ”

Instead, as reported by the Coalition for a Prosperous America, “the Treasury negotiated a ‘Joint Declaration of Macroeconomic Policy Authorities’ that largely restates existing obligations, fails to include any additional enforcement tools, and merely adds yet another consultation process. The Joint Declaration:

  • “Entails a ‘confirmation’ that each TPP country is “bound” under IMF rules to “avoid  manipulating exchange rates or the international monetary system in order to prevent effective Balance of payments Adjustment  or to gain an unfair competitive advantage.
  • Specifies that each macroeconomic authority is to ‘take policy actions to foster an exchange rate system that reflects underlying economic fundamentals and avoid persistent exchange rate misalignments. Each Authority will refrain from competitive devaluation and will not target its country’s exchange rate for competitive purposes.
  • Requires regular reporting on foreign exchange intervention and reserve holdings.
  • Establishes regular consultations among the macroeconomic authorities. This will be in addition to the periodic meetings of IMF officials, APEC, the G-7, the G-20 and bilateral consultations.”

Therefore, nothing has changed in 70 years ago. If they haven’t complied in the past, how could they be expected to comply with their IMF obligations in the future? Is another forum going to be of any value?

In the case of Japan, its government has strategically reduced the yen’s value to give its companies a massive global price advantage. Since Shinzo Abe became Japan’s prime minister in December 2012, the Japanese currency has fallen by 55%, and he has been a full participant in IMF meetings. Three years ago, one U.S. dollar bought 76 yen. Today, one U.S. dollar buys 105 yen, down from a high of 120 yen at the end of 2015.

This manipulation subsidizes Japan’s car companies who can now undercut U.S. competitors and make a bigger profit without innovation or quality improvements. The Japanese government’s currency manipulation gives Japanese automakers as much as $7,000 more profit per car.

Toyota, the world’s largest carmaker, does not want the party to end. An article by David Fickling of Bloomberg on May 12, 2016, stated,  “Foreign-exchange effects will pull about 935 billion yen from Toyota’s operating income in the coming 12 months, assuming that the yen will strengthen to 105 to the greenback, relative to about 109 at present. ”

In my recent article on the U.S. International Trade Commission (USITC) report, “Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors,” I quoted the following:  “U. S. passenger vehicle imports would increase by $4.3 billion above the baseline upon full implementation of the agreement (table 4.15). Imports from Japan would increase by $1.6 billion, and imports from NAFTA partners would increase by $1.8 billion, making up the majority of the increase.”

No wonder that the American Automotive Policy Council, Inc. (AAPC) issued the following press release on May 26, 2016 regarding the USITC report, which states in part, ” We hope that Congress will carefully review this report, specifically how the ITC has measured the impact of the proposed Trans-Pacific Partnership on the U.S. auto industry and American manufacturing. American automakers remain concerned about possible currency manipulation by TPP trade partners, including Japan. AAPC, as well as economists from across the ideological spectrum, agree that the U.S. government should include enforceable rules prohibiting currency manipulation in its trade agreements to produce a positive economic impact on American manufacturing.”

Do you think that the Obama’s administration claim of “strict monitoring” of foreign currency manipulation will be enough? In May 2016, Japan’s finance minister, Taro Aso, said he will act to prevent the currency markets from working, telling Japan’s parliament he was “prepared to undertake intervention” in the foreign exchange market if the yen strengthens. So, a U.S. “move to put Japan on a monitoring list ‘won’t constrain’ Tokyo from intervening to manipulate the value of their yen.”

According to Michael Stumo, “There is ample precedent for taking strong action to correct currency misalignment in conjunction with past major trade agreements. The Tokyo Round and the Uruguay Round were each preceded by a realignment of currencies to reduce imbalances in the world economy. If the Joint Declaration indeed would make any difference in the real world of trade, one might expect it to come into effect immediately. Instead… Joint Declaration will take effect if and when the TPP enters into force.”

The bottom line is that economic and trade negotiators together have failed to produce even a modest step forward toward an effective, enforceable currency provision. As currently written, neither the Joint Declaration nor the TPP will stop currency manipulation by Japan or any other country. The only effective alternative would seem to be enactment of the Currency Reform for Fair Trade Act (H.R. 820) or its equivalent, the Trade Facilitation and Trade Enforcement Act of 2015 (H.R.644). Either would mandate the use of WTO-consistent remedies to offset injurious currency manipulation. This modest first step toward confronting mercantilist currency policies is long overdue.

 

 

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Why Should the U. S. Have a Specific Productivity Policy?

July 27th, 2016

This question is answered by  Robert D. Atkinson, President of the Information Technology & Innovation Foundation (ITIF) in Part II of the  report, “Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies.” He states, “Rather than think of an economy as a large market with self-interested actors transacting on the basis of price and seeking to maximize productivity, it is more accurate to conceive of an economy as a large, integrated enterprise that requires coordination of activities that individual enterprises will not effectively undertake on their own.”

 

His opinion is contradictory to that of most Anglo-Saxon nation economists, whose policies are based on two major competing doctrines vying for influence: “neoclassical and neo-Keynesian economics, neither of which supports a national productivity policy.” In a nutshell, he states, “the neoclassical economic doctrine is focused on limiting government’s role in the economy, even as neo-Keynesians see the government’s main role as managing the business cycle and supporting a fairer distribution of income.” His definitions were so simple that even non-economists like me could understand them:

Neoclassical ? focuses on the “managing scarce resources in such a way that maximizes the net benefit from their use, and that produces the quantity and mix of goods and services most beneficial to society.”

Neo-Keynesian ? is “grounded in the core belief that demand for goods and services from business investment, government spending, and consumer spending drives growth.”

Atkinson particularly criticizes neoclassical economists because they “do not study how societies create new forms of production, products, and business models to expand productivity; rather, they study markets to see how commodities are exchanged.”

He criticizes neo-Keynesian economic policy prescriptions because they “revolve around increasing government spending to keep the economy at full employment and ensuring economic fairness and redistribution, because…their goal is not productivity growth, it is full employment.”

Atkinson states. “Thus, the first step for any policymaker seeking to maximize the economy’s productivity is to reject the conventional neoclassical and neo-Keynesian economic advice and embrace an alternative economic doctrine grounded in an understanding of the economy as an integrated, complex enterprise.”

He adds, “This approach is grounded in understanding that productivity is less about markets and more about organizations and systems, in particular about how technology is developed and deployed to drive productivity.”

Atkinson concludes, “Few conventional economists bother to “look inside the black box” of actual organizations or industries and crossindustry systems. Yet it is there that the keys to raising productivity and the keys to the right productivity policy will be found.” He comments that “conventional economics is of little help in understanding the sources of productivity growth, much less in providing useful or actionable advice on productivity policy.”

The rest of Part II discusses how “public goods, externalities and other enterprise failures, and system interdependencies for development and adoption of productivity-enhancing tools all mean that markets alone will not maximize productivity.”

Public goods are “a good or service provided without profit to all members of a society—to increase their productivity.” Some examples are transportation infrastructure such as roads, highways, bridges, airports, seaports or the education infrastructure for K–12 and higher education. Atkinson comments,”… though public goods are necessary, they are not sufficient.”

Atkinson comments that rather than maximizing productivity companies “can maximize profits from increasing revenues or reducing costs. Many companies focus less on boosting productivity and more on increasing revenues, either by getting more customers or increasing revenue per customer by selling products or services with higher margins.”

What he does not cover is that the best way for companies to boost productivity is to transform themselves into lean companies through the adoption and implementation of lean principles, tools, and strategies.

In addition, “some industries do not have strong incentives for driving productivity because “productivity increases hurt its implementers…In such industries, workers ‘control the means of Production’ and therefore productivity is a direct threat to their jobs.”

I found his brief discussion on the effect of system interdependencies on productivity interesting in how he shows that there is a relationship between product innovation and “interdependencies that are only observable and actionable at the industry or economy level.” For example, “when Apple developed the iPod, it needed customers with broadband Internet access and it needed music to be available for purchase online. Without either, the iPod would have gone the way of the Newton (an earlier, failed Apple attempt at creating a PDA).”

Market failure can stem “from markets tending to be poor at coordinating action when multiple parties need to act together synergistically and simultaneously. These chicken-or egg challenges must be overcome for productivity-enhancing innovation to occur in many technology platforms…Unless government plays a facilitating role, relying on markets alone can mean significantly delayed implementation.”

Atkinson identifies another challenge:  “Many technology solutions require mutual adoption and coordination for them to be effectively deployed… For example, when automobiles were first developed few paved roads had been built. Only after a certain number of autos were sold was demand strong enough that the government needed to build roads. But initially cars could be driven on dirt roads that horses used, so adoption could grow gradually in the absence of government construction

In Part III, Atkins lays out a comprehensive and actionable agenda for spurring productivity growth, which can be used as a guide to tailor national productivity policy policies. This agenda includes policy recommendations…and the ways in which governments need to organize themselves to advance effective productivity policies.”

He states, “The conventional theory holds that the only thing government can do is to remove barriers and fix policy failures so that firms reacting to price signals can do whatever they may choose to drive productivity. This overly passive framework ignores the complexity and enterprise-like nature of economies, which actually require more strategic productivity policies.” He recommends that an “effective productivity policy needs to go beyond the standard limits to embrace four other key components:”

  1. Incentives, including tax policies, to encourage organizations to adopt more and newer “tools” to drive productivity…In particular, governments should use the tax code to provide incentives for acquisition of new capital equipment
  2. .Policies to spur the advance and take-up of systemic, platform technologies that accelerate productivity across industries. Many of the information technologies central to driving future productivity have chicken-or-egg network effects which mean that adoption will lag unless governments adopt smart, technology-specific policies.
  3. A research and development strategy focused on spurring the development of productivity-enabling technologies, such as robotics…Governments need to focus a much larger share of their R&D budgets on advancing technologies that will reduce the need for labor.
  4. Sectoral productivity policies that reflect the unique differences between industries. In terms of productivity and productivity policy, industries differ in significant ways…Any effective national productivity policy will need to be grounded in analysis-based, sector-based productivity strategies.

Within these four policy components, Atkinson makes some recommendations that are more controversial, such as:

Roll back policies favoring small business – “special benefits to small business and discriminatory policies that place tax and regulatory burdens only on large businesses. He recommends, “To boost productivity, governments should embrace firm-size agnosticism in all policies.” (pages 70-73)

Replace the term informal with the accurate term the illegal economy – “individuals are breaking the law by not registering their businesses and paying taxes. Informality is a drag on productivity growth, not a progressive force.” (pages 73-74)

Set a reasonable set minimum wage indexed to inflation – this helps make it more economical for organizations to substitute capital for labor” and “in some sectors may expedite the adoption of automated equipment and new technology to increase labor productivity.” (page 81)

Atkinson warns, “Countries that protect entrenched, incumbent, or politically favored industries from market-based competition only damage their own country’s productivity and economic growth potential… This limits the ability of firms at the productivity frontier to take market share away from firms with lower productivity.”

Atkinson acknowledges that “The challenge is that few governments have designed their scientific research programs explicitly around advancing technologies to drive productivity. Instead, they follow the advice of neoclassical economists that governments should not pick particular technology areas and should focus on curiosity-directed basic science… if economies are to maximize productivity growth, they need to craft technology research agendas specifically around productivity.”

In fact, Atkinson recommends that “Governments need to focus on identifying and funding many more research and engineering projects that are specifically targeted to developing Technology that can replace human labor.”

He explains, “Productivity policy cannot be fully effective unless it is grounded in a sophisticated understanding that industries differ significantly with regard to their productivity dynamics… Three key factors differentiate industries when it comes to considering productivity policy.” They are

  • Scale ? Industries differ in terms of average firm size.
  • Competition ? Industries differ in the extent to which they face competition.
  • Incentives ? The third factor is intensity of incentives for an industry to increase productivity.

This is why Atkinson recommends that “An effective national productivity policy needs to be based on an analysis of individual industries and when appropriate, broader production systems.”

In his conclusion, Atkinson recommends, “The single most important step governments can take to boost productivity is to make higher productivity the principal goal of economic policy, more important than managing the business cycle, defending liberty, or promoting equality.”

He adds, “National governments should also identify or establish one agency or laboratory whose main mission is to support development and adoption of productivity technology as well as of platform and sectoral productivity strategies. In the United States, this might be the National Institute of Standards and Technology.”

Finally, Atkinson states: “Productivity is the key to improving living standards—so policymakers should ignore conventional economists who say there is little government can do about it and instead make it the principal goal of economic policy.”

Even if you do not agree with all of his premises, recommendations, and conclusions, this is an important report that should be widely read and debated for some time to come.

 

 

This question is answered by  Robert D. Atkinson, President of the Information Technology & Innovation Foundation (ITIF) in Part II of the  report, “Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies.” He states, “Rather than think of an economy as a large market with self-interested actors transacting on the basis of price and seeking to maximize productivity, it is more accurate to conceive of an economy as a large, integrated enterprise that requires coordination of activities that individual enterprises will not effectively undertake on their own.”

 

His opinion is contradictory to that of most Anglo-Saxon nation economists, whose policies are based on two major competing doctrines vying for influence: “neoclassical and neo-Keynesian economics, neither of which supports a national productivity policy.” In a nutshell, he states, “the neoclassical economic doctrine is focused on limiting government’s role in the economy, even as neo-Keynesians see the government’s main role as managing the business cycle and supporting a fairer distribution of income.” His definitions were so simple that even non-economists like me could understand them:

 

Neoclassical ? focuses on the “managing scarce resources in such a way that maximizes the net benefit from their use, and that produces the quantity and mix of goods and services most beneficial to society.”

 

Neo-Keynesian ? is “grounded in the core belief that demand for goods and services from business investment, government spending, and consumer spending drives growth.”

 

Atkinson particularly criticizes neoclassical economists because they “do not study how societies create new forms of production, products, and business models to expand productivity; rather, they study markets to see how commodities are exchanged.”

 

He criticizes neo-Keynesian economic policy prescriptions because they “revolve around increasing government spending to keep the economy at full employment and ensuring economic fairness and redistribution, because…their goal is not productivity growth, it is full employment.”

 

Atkinson states. “Thus, the first step for any policymaker seeking to maximize the economy’s productivity is to reject the conventional neoclassical and neo-Keynesian economic advice and embrace an alternative economic doctrine grounded in an understanding of the economy as an integrated, complex enterprise.”

 

He adds, “This approach is grounded in understanding that productivity is less about markets and more about organizations and systems, in particular about how technology is developed and deployed to drive productivity.”

 

Atkinson concludes, “Few conventional economists bother to “look inside the black box” of actual organizations or industries and crossindustry systems. Yet it is there that the keys to raising productivity and the keys to the right productivity policy will be found.” He comments that “conventional economics is of little help in understanding the sources of productivity growth, much less in providing useful or actionable advice on productivity policy.”

 

The rest of Part II discusses how “public goods, externalities and other enterprise failures, and system interdependencies for development and adoption of productivity-enhancing tools all mean that markets alone will not maximize productivity.”

 

Public goods are “a good or service provided without profit to all members of a society—to increase their productivity.” Some examples are transportation infrastructure such as roads, highways, bridges, airports, seaports or the education infrastructure for K–12 and higher education. Atkinson comments,”… though public goods are necessary, they are not sufficient.”

 

Atkinson comments that rather than maximizing productivity companies “can maximize profits from increasing revenues or reducing costs. Many companies focus less on boosting productivity and more on increasing revenues, either by getting more customers or increasing revenue per customer by selling products or services with higher margins.”

 

What he does not cover is that the best way for companies to boost productivity is to transform themselves into lean companies through the adoption and implementation of lean principles, tools, and strategies.

 

In addition, “some industries do not have strong incentives for driving productivity because “productivity increases hurt its implementers…In such industries, workers ‘control the means of

Production’ and therefore productivity is a direct threat to their jobs.”

 

I found his brief discussion on the effect of system interdependencies on productivity interesting in how he shows that there is a relationship between product innovation and “interdependencies that are only observable and actionable at the industry or economy level.” For example, “when Apple developed the iPod, it needed customers with broadband Internet access and it needed music to be available for purchase online. Without either, the iPod would have gone the way of the Newton (an earlier, failed Apple attempt at creating a PDA).”

 

Market failure can stem “from markets tending to be poor at coordinating action when multiple parties need to act together synergistically and simultaneously. These chicken-or egg challenges must be overcome for productivity-enhancing innovation to occur in many technology platforms…Unless government plays a facilitating role, relying on markets alone can mean significantly delayed implementation.”

 

Atkinson identifies another challenge:  “Many technology solutions require mutual adoption and coordination for them to be effectively deployed… For example, when automobiles were first developed few paved roads had been built. Only after a certain number of autos were sold was demand strong enough that the government needed to build roads. But initially cars could be driven on dirt roads that horses used, so adoption could grow gradually in the absence of government construction

 

In Part III, Atkins lays out a comprehensive and actionable agenda for spurring productivity growth, which can be used as a guide to tailor national productivity policy policies. This agenda includes policy recommendations…and the ways in which governments need to organize themselves to advance effective productivity policies.”

 

He states, “The conventional theory holds that the only thing government can do is to remove barriers and fix policy failures so that firms reacting to price signals can do whatever they may choose to drive productivity. This overly passive framework ignores the complexity and enterprise-like nature of economies, which actually require more strategic productivity policies.” He recommends that an “effective productivity policy needs to go beyond the standard limits to embrace four other key components:”

 

  1. Incentives, including tax policies, to encourage organizations to adopt more and newer “tools” to drive productivity…In particular, governments should use the tax code to provide incentives for acquisition of new capital equipment.

 

  1. Policies to spur the advance and take-up of systemic, platform technologies that accelerate productivity across industries. Many of the information technologies central to driving future productivity have chicken-or-egg network effects which mean that adoption will lag unless governments adopt smart, technology-specific policies.

 

  1. A research and development strategy focused on spurring the development of productivity-enabling technologies, such as robotics…Governments need to focus a much larger share of their R&D budgets on advancing technologies that will reduce the need for labor.

 

  1. Sectoral productivity policies that reflect the unique differences between industries. In terms of productivity and productivity policy, industries differ in significant ways…Any effective national productivity policy will need to be grounded in analysis-based, sector-based productivity strategies.

 

Within these four policy components, Atkinson makes some recommendations that are more controversial, such as:

 

Roll back policies favoring small business – “special benefits to small business and discriminatory policies that place tax and regulatory burdens only on large businesses. He recommends, “To boost productivity, governments should embrace firm-size agnosticism in all policies.” (pages 70-73)

 

Replace the term informal with the accurate term the illegal economy – “individuals are breaking the law by not registering their businesses and paying taxes. Informality is a drag on productivity growth, not a progressive force.” (pages 73-74)

 

Set a reasonable set minimum wage indexed to inflation – this helps make it more economical for organizations to substitute capital for labor” and “in some sectors may expedite the adoption of automated equipment and new technology to increase labor productivity.” (page 81)

 

Atkinson warns, “Countries that protect entrenched, incumbent, or politically favored industries from market-based competition only damage their own country’s productivity and economic growth potential… This limits the ability of firms at the productivity frontier to take market share away from firms with lower productivity.”

 

Atkinson acknowledges that “The challenge is that few governments have designed their scientific research programs explicitly around advancing technologies to drive productivity. Instead, they follow the advice of neoclassical economists that governments should not pick particular technology

areas and should focus on curiosity-directed basic science… if economies are to maximize productivity growth, they need to craft technology research agendas specifically around productivity.”

 

In fact, Atkinson recommends that “Governments need to focus on identifying and funding many more research and engineering projects that are specifically targeted to developing Technology that can replace human labor.”

 

He explains, “Productivity policy cannot be fully effective unless it is grounded in a sophisticated understanding that industries differ significantly with regard to their productivity dynamics… Three key factors differentiate industries when it comes to considering productivity policy.” They are

 

  • Scale ? Industries differ in terms of average firm size.
  • Competition ? Industries differ in the extent to which they face competition.
  • Incentives ? The third factor is intensity of incentives for an industry to increase productivity.

 

This is why Atkinson recommends that “An effective national productivity policy needs to be based on an analysis of individual industries and when appropriate, broader production systems.”

 

In his conclusion, Atkinson recommends, “The single most important step governments can take to boost productivity is to make higher productivity the principal goal of economic policy, more important than managing the business cycle, defending liberty, or promoting equality.”

 

He adds, “National governments should also identify or establish one agency or laboratory whose main mission is to support development and adoption of productivity technology as well as of platform and sectoral productivity strategies. In the United States, this might be the National Institute of Standards and Technology.”

 

Finally, Atkinson states: “Productivity is the key to improving living standards—so policymakers should ignore conventional economists who say there is little government can do about it and instead make it the principal goal of economic policy.”

 

Even if you do not agree with all of his premises, recommendations, and conclusions, this is an important report that should be widely read and debated for some time to come.

 

 

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Posted in Economic Development, Economy, Innovation, Jobs, Manufacturing | No Comments »

USITC Report Reveals TPP Will Shrink U. S. Manufacturing

June 1st, 2016

On May 18, 2016, the U.S. International Trade Commission (USITC) released their report, “Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors,” relative to the Agreement that President Obama signed in February with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

The USITC analysis concedes that the TPP will cause manufacturing to shrink in terms of employment, output and share of the US economy. Our manufacturing trade deficit will become worse.

Reaction to the USITC report has been mixed at best. “The U.S. Chamber Executive Vice President and Head of International Affairs Myron Brilliant welcomed the release of the U.S. International Trade Commission (ITC) report on the likely impact of the Trans-Pacific Partnership (TPP) on the U.S. economy with the following statement:

“While we have yet to fully digest the ITC’s assessment, the report at first glance provides substantive support for the Chamber’s view that the TPP is in our national economic interest. By eliminating thousands of tariffs and other barriers to the export of U.S.-made goods and services, the TPP will create new opportunities for American workers, farmers, ranchers, innovators, and companies.”

On the other side of the spectrum, AFL-CIO President Richard Trumka issued a statement, which in part said, “This ITC report is so damaging that any reasonable observer would have to wonder why the administration or Congress would spend even one more day trying to turn this disastrous proposal into a reality. Even though it’s based on unrealistic assumptions, the report could not even produce a positive result for U.S. manufacturing and U.S. workers. One of many shockers is just how meager the purported benefits of the TPP are. A mere .15% of GDP growth over 15 years is laughably small…”

The Politico Morning Trade blog of Friday, May 20, 2016 included this rebuttal:” FROMAN FIRES BACK: U.S. Trade Representative Michael Froman continued his effort to capitalize on the ITC report. Speaking to business owners by telephone Thursday, the top U.S. trade official pointed out that the independent commission “conservatively” estimated the TPP would boost both U.S. exports and national income by $57 billion by 2032 – gains that would continue annually.

“This was really the president’s direction, to make sure we’re doing trade right,” Froman said. “And that meant making sure the trade agreement worked for American workers, and we think we’ve achieved that in this agreement…Froman said the study focused heavily on tariffs and didn’t project the economic benefits of other major parts of the agreement, including rules on state-owned enterprises, labor and the environment.”

Coalition for a Prosperous America CEO Michael Stumo participated on a “listen only” basis during the business group conference call on May 20, 2016. Afterward, he commented on his blog, “Despite the fact that the report nullified Froman’s entire economic case for the TPP, you would never know it from his talk. Froman created a parallel universe which was enabled by the Business Forward group sponsoring the call.”

Let us consider some of the highlights discussed in the 792-page report. The Executive Summary that the USITC “used a dynamic computable general equilibrium model to determine the impact of TPP relative to a baseline projection that does not include TPP….The model estimated that TPP would have positive effects, albeit small as a percentage of the overall size of the U.S. economy” by year 15 [2032].” The main findings were:

  • S. annual real income would be $57.3 billion (0.23 percent) higher than the baseline projections (which statistically means zero growth).
  • Real GDP would be $42.7 billion (0.15 percent) higher (again, statistically zero).
  • Employment would be 0.07 percent higher (128,000 full-time equivalents).
  • S. exports and U.S. imports would be $27.2 billion (1.0 percent) and $48.9 billion (1.1 percent) higher, respectively, relative to baseline projections.
  • S. exports to new FTA partners would grow by $34.6 billion (18.7 percent).
  • S. imports from those countries would grow by $23.4 billion (10.4 percent).
  • Output in manufacturing, natural resources, and energy would be $10.8 billion (0.1 percent) lower with the TPP than without the agreement.

Do you notice that the first four projections are less than 1 percent? Our economy has been limping along at only 1.5 percent growth in GDP, which is considered terrible. Yet, the TPP is only estimated to increase GDP by 0.15 percent in 15 years, or 0.01 percent each year. How could anyone be excited about this level of growth? For the first time, the USITC projected a worsening trade deficit with the world, which nullifies any meager net export benefit with new TPP countries. Page 21 admits that the overall U. S. trade deficit will worsen by $21.7B.

The Coalition for a Prosperous America released a flyer, “USITC Report: No Economic Upside to Trans-Pacific Partnership – Manufacturing Decline and Worsened Trade Performance” that states, “TPP Will Only Create 128,000 Jobs in 15 Years. That’s less than the 160,000 jobs created in April 2016…The US International Trade Commission projects increased national income less than one quarter of one percent [0.23%] – well within the margin of error and a statically meaningless growth over 15 years.”

The flyer points out that “the report is still too optimistic because it makes these false assumptions:

  • TPP countries will not manipulate currency
  • Job losers will immediately gain new jobs with no transition costs
  • TPP countries will stop all mercantilistic state-capitalism strategies”

Returning to the rosy projections, the USITC report states, “Among broad sectors of the U.S. economy, agriculture and food would see the greatest percentage gain relative to the baseline projections: Output would be $10.0 billion, or 0.5 percent, higher by year 15.” That is about equal to just one-year’s worth of sorghum production!

The Executive Summary states that the services sector represents the largest share of the U.S. economy, and it would expand the most:

  • “U.S. imports of services would be 1.2 percent higher
  • S. exports of services would be 0.6 percent higher
  • Services sector would have a gain of $42.3 billion (0.1 percent) in output
  • Employment would be 0.1 percent higher.”

If the service sector is supposed to expand the most and it is only 0.1 percent, why does page 34 state that the Services trade balance will worsen by $2.2B? This doesn’t sound good to me, especially when all of the projected benefits of past agreements were proved to be way too optimistic.

Chapter 4 discusses the impact on Manufactured Goods and Natural Resource and Energy Products. The Introduction states, “The TPP Agreement is likely to have a limited impact on U.S. production and trade of manufactured goods and natural resource and energy (MNRE) products. The U.S. manufacturing sector is already more liberalized than other sectors, such as agriculture and services, and duties are generally low.” This means that because duties are already low, the TPP will be less beneficial to the manufacturing sector.

Even with the “most optimistic possible” scenario for its projections, you noticed above that “Output in manufacturing, natural resources, and energy would be $10.8 billion (0.1 percent) lower with the TPP than without the agreement.”

This means that U.S. manufacturing will decline, and the manufacturing trade deficit will worsen by $24B (pages 30-31). Manufacturing employment will decrease by 0.2% (0.2% is 240,000 workers based on 12M mfg employment in 2013). Obviously, the 128,000 jobs the TPP is supposed to create in 15 years will not be the higher paying manufacturing jobs.

Chapter 4 also “examines in more depth five sectors for which there will be significant U.S. trade liberalization with the full implementation of TPP: (1) passenger vehicles; (2) textiles and apparel; (3) footwear; (4) chemicals; and (5) titanium metal.”

Passenger Vehicles: Buried in 40 pages of discussion, the report states that “Overall U.S. passenger vehicle exports would increase by more than 2 percent ($2.9 billion), and parts exports would increase by 1.5 percent ($2.1 billion) by year 30, relative to the baseline estimate.” However, ” (page 232)

“U. S. passenger vehicle imports would increase by $4.3 billion above the baseline upon full implementation of the agreement (table 4.15). Imports from Japan would increase by $1.6 billion, and imports from NAFTA partners would increase by $1.8 billion, making up the majority of the increase. Parts imports would increase by $4.5 billion, with imports from NAFTA partners increasing by $5.5 billion.” (page 249)

Textiles: “TPP would result in a 1.4 percent ($1.9 billion) increase in U.S. imports of apparel over the 2032 baseline (i.e., expected level of imports in 2032 without TPP), and a 0.3 percent ($10 million) increase in U.S. exports.” (page 254)

Footwear: “…U.S. imports from all TPP countries would rise by $1.6 billion (23.4 percent). Most of this increase would be accounted for by imports of footwear from Vietnam, the second-largest supplier overall and the biggest TPP supplier of footwear to the U.S. market.” (pages 272-273)

Chemicals: “…U.S. exports of chemical products, including pharmaceuticals, would be $1.9 billion (0.7 percent) higher than 2032 baseline estimates and U.S. imports would be $5.3 billion (1.3 percent) higher than the baseline, due in part to tariff reductions.” (page 284)

Titanium: The most significant detrimental effect of the TPP would be on the Titanium industry. The report states, ” U.S. titanium metal641 imports from TPP members, according to Commission estimates, would likely increase by $202.1 million (109.7 percent) as compared to the 2032 baseline. U.S. output would decrease by $202.4 million (1.2 percent) and employment would similarly decline by 1.3 percent, as compared to the 2032 baseline. Japan is the principal source of U.S. titanium imports,642 despite a 15 percent U.S. import duty on both unwrought titanium (i.e., titanium sponge, ingot, billet, and powders) and wrought titanium (e.g., bars, sheets, and tubes) (box 4.12), and would benefit the most from the removal of duties. U.S. exports of titanium would be slightly lower—other TPP members already apply low or zero duties on imports of these products.” (pages 292-293)

Since all other above industry sectors would be adversely affected by the TPP), it strengthens my opposition to it being approved by Congress. If you work in the manufacturing industry, I strongly recommend that you contact your Congressional Representative and urge them to oppose approval of the TPP. We don’t need a further decline of U. S. manufacturing and more loss of manufacturing jobs!

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Reshoring has Become an Economic Development Strategy

May 24th, 2016

As a result of my writing and speaking about returning manufacturing to America through reshoring, I recently received information from the International Economic Development Council (IEDC) inviting me to educate my audience on the findings of their research and the tools and resources available when manufacturers are considering reshoring.

The IEDC is a non-profit membership organization serving economic developers with more than 4,700 members. Their mission as economic developers is to “promote economic well-being and quality of life for their communities, by creating, retaining and expanding jobs that facilitate growth, enhance wealth and provide a stable tax base.”

Last year, the IEDC received a grant from the U.S. Economic Development Administration to “examine current reshoring practices and create materials to spread awareness of reshoring trends, tools and resources that are available to ease the process.” For the past 16 months, IEDC has conducted research on why companies are choosing to reshore and what resources are available to assist American companies that are considering reshoring. In the past year, IEDC has provided educational training sessions with reshoring experts, such as Harry Moser of the Reshoring Initiative, for economic developers.

IDEC also created the Reshoring American Jobs webpage, a project funded by the U.S. Economic Development Administration (EDA). “It is the go-to place to learn about and find resources to support activities encouraging reshoring in communities. Economic developers will find the latest news, case studies, and in-depth research on reshoring activity to help them stay in-the-know on reshoring trends information.” The micro site is divided into three sections:

Understanding Reshoring” discusses the critical role reshoring plays in strengthening the economy, identifies challenges to reshoring, and highlights lessons learned from communities that have worked with reshored companies.”

  • Defining the Reshoring Discussion” White Paper
  • National Assessment of Reshoring Activities
  • Webinars: Defining the Reshoring Discussion, Reshoring Tools….They’re Out There
  • Tools for Reshoring “provides resources and best practices in reshoring American jobs to aid economic developers in assisting reshoring companies.”
  • Reshoring in the Media “tracks the latest discussions on trends covered by popular and trade media. The content will help demystify the reshoring movement and serves as a practical reference for economic development professionals.”

In March 2016, IEDC published a 30-page white paper on “Defining the Reshoring Discussion,” in which the introduction and historical perspective states, “…as foreign countries strengthened their manufacturing competitiveness over the years, American manufacturers struggled to maintain their cost and productivity advantages on a global scale. Some American manufacturers adjusted to foreign competition by shifting their focus to complex, high-value products and industries—and increasing manufacturing investment, output, and employment. Others either closed U.S.-based factories or sought cost savings by offshoring some, or all, of their operations to less expensive foreign locations. Shortly after China joined the World Trade Organization at the end of 2001, a large exodus of U.S. manufacturers occurred.”

Now, however, supply chain dynamics have changed, and the report states, “…the cost savings that American firms had enjoyed began to erode around the year 2010. Changing macro-economic factors, such as labor and transportation cost increases, absorbed much of the savings from which manufacturers had previously benefited. Also, after experiencing offshoring firsthand, many companies found that hidden costs often outweighed the cost benefits of manufacturing overseas. Some of these hidden costs that were not always considered include factors such as increased costs of monitoring and quality control, uncertain protection of intellectual property, and lengthy supply chains.”

While the white paper presents a broad overview of the discussion of reshoring, some common themes emerged from their review of resources:

  • “The decision to reshore is often described as a response by business to both macroeconomic and internal business-related factors.
  • The term reshoring is used to describe a range of activities that occur in numerous industries, not just manufacturing.
  • A company’s decision to reshore can be encouraged through the creation of favorable business conditions, a skilled workforce, and incentives that encourage innovative manufacturing practices.
  • Reshored jobs will likely be different from the jobs that existed before offshoring gained momentum or jobs that currently exist offshore.”

The reason economic development agencies have become interested in reshoring is that “The impacts of reshoring extend beyond individual companies and provide benefits for entire regions as the effects multiply through local economies.”

From an economic development viewpoint, “it is important to understand that reshoring is fundamentally a location decision. In this sense, a company’s decision to stay in the U.S. or relocate will be based on its total operation costs in a given location.”

The white paper highlights some of the findings of the data from 25 national economies research studied by the Boston Consulting Group (BCG) from 2004 to 2014. The BCG study

found that the following factors significantly impact manufacturing location decisions:

  • Increased wages – “China’s wages rose 15 to 20 percent per year at the average Chinese factory”
  • Fluctuating currency value – “when compared against the U.S. dollar, the Chinese yuan increased in value by 35 percent
  • “Labor productivity, which is measured as the gains in output per manufacturing Worker”
  • “Reduction of energy costs from 2004 to 2014, especially in energy-dependent industries such as iron and steel and chemicals industries”

Naturally, the white paper mentions the work of Harry Moser, founder of the Reshoring Initiative, in developing the Total Cost of Ownership Estimator™ in an effort “to help decision-makers estimate total costs of outsourced parts or products by aggregating, then quantifying all cost and risk factors into a single cost.”

The paper then discusses the different definitions of reshoring from a popular understanding to a more academic definition. The most common definition is “the return of Manufacturing to the U.S.” From an economic development perspective, the following definition may be more appropriate: “a manufacturing location decision that is a change in policy from a previous decision to locate manufacturing offshore from the firm’s home location.” (Ken Cottrill in his article titled “Reshoring: New Day, False Dawn, or Something Else.”) Cottrill divides reshoring into four categories:

“In-house reshoring refers to the relocation of manufacturing activities, which were being performed in facilities owned abroad, back to facilities in the U.S.”

“Relocating in-house manufacturing activities, which were being performed in facilities abroad, back to U.S.-based suppliers, is labeled “reshoring for outsourcing.”

Outsourced reshoring describes the process of relocating manufacturing activities from offshore suppliers back to U.S.-based suppliers.

Reshoring for Insourcing is “when a company relocates manufacturing activities being outsourced to offshore suppliers back to its U.S.-based facilities, it is considered reshoring for insourcing.”

The authors comment that reshoring applies to industries other than manufacturing, such as the information technology (IT) sector, stating that ”challenges such as time zone differences, identity theft, privacy concerns, and issues with utility infrastructure abroad led more companies to return their IT operations to the U.S.”

The white paper contains several pages describing what is currently being done to encourage reshoring by government programs such as the Make It in America Challenge and National Network for Manufacturing Innovation (NNMI), which are too lengthy to discuss in this short article. However, I do want to describe the following tools that can be useful to economic development professionals as well as companies in the reshoring process:

Assess Costs Everywhere (ACE) Tool: This U.S. Department of Commerce tool was developed within the Economics and Statistics Administration, in partnership with the NIST-MEP, and with support from various agencies within the U.S. Department of Commerce, the United States Patent and Trademark Office, and SelectUSA. “The tool provides a framework for manufacturers to assess total costs by identifying and discussing 10 cost and risk factors. These include: labor wage fluctuations; travel and oversight; shipping time; product quality; inputs such as energy costs; intellectual property protection; regulatory compliance; political and security risks; and trade financing costs.” ACE also provides case studies and links to public and private resources.

National Excess Manufacturing Capacity Catalog (NEXCAP): This resource was developed by the University of Michigan and “provides a catalog of vacant manufacturing facilities as well as critical data on skilled workforce supply, community assets, and other information pertinent to location decisionmaking.” It was funded by the Economic Development Administration.

U.S. Cluster Mapping Project: This is another project funded by the EDA and led by Harvard Business School’s Institute for Strategy and Competitiveness by “conducting research and publishing data records on industry clusters and regional business environments in the United States…[allows] users to share and discuss best practices in economic development, policy and innovation.”

The paper discusses the importance of “industrial commons,” a term coined by Harvard Business School’s Gary P. Pisano and Willy C. Shih in 2009,which refers” to a foundation of knowledge and capabilities that is shared within an industry sector in a particular geographic area. This includes technical, design, and operational capabilities as well as “R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology.”

Next, it discusses the impact of innovation and one point particularly worth noting is: “Manufacturing outputs have more than doubled since 1972, in constant dollars, even with a 33 percent reduction in employment…Improved output and efficiency is largely attributed to technological advancements that increase productivity and decrease labor-intensive activities. As gaps between wages in developed and developing economies continue to shrink, U.S. manufacturers will need to focus on innovation, using technology to improve productivity and reserving labor for value-added activities.”

In the section considering the need for more workforce development and what could be done in the future to encourage reshoring, “Mark Muro, Senior Fellow and Director of the Metropolitan Policy Program at the Brookings Institution, argues that offering incentives focused solely on manufacturing reshoring is not enough… the focus should be on building the vibrancy of the critical advanced manufacturing industry sector. Muro argues that the U.S. must strengthen the depth of the nation’s regional advanced industry ecosystems…he calls for governments, companies, and individuals to work collectively to rebuild the nation’s local skills pools, industrial innovation capacity, and supply chains.”

While no in-depth studies have been conducted on the potential effect of reshoring on creating jobs, the paper provides the following chart showing estimates under various scenarios (recreated):

Scenario Description Source Jobs Reshored Cumulative Total Jobs
Using TCI analysis Reshoring Initiative 500,000 1,000,000
If Chinese Wage Trends continue at 18%/year Boston Consulting Group 1,000,000 2,000,000
Adoption of better U. S. training, increased process improvements & competitive tax rates Federal Government’s Advanced Manufacturing Partnership 2,000,000 4,000,000
End of foreign currency manipulation Almost all manufacturing groups 3,000,000 6,000,000
Cumulative Total jobs is based on a two support jobs created for every manufacturing job reshored

The paper states, “The brightest reshoring prospects involve those that can profit from the current manufacturing environment. This would include manufacturers that depend on natural gas, require minimal labor, and need flexibility in production to meet changing customer needs.”

The authors’ conclusion in the paper echoes a conclusion in the second edition my book published in 2012:   They conclude that “there are opportunities for various levels of government, the private sector, and partnerships between the two to create an environment to support the manufacturers who can reshore.” Let’s not waste another four years coming to the same conclusion.

 

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Is Bi-partisan Tax Reform Possible?

April 27th, 2016

Tis the season of talk about tax reform. Every presidential election cycle, the candidates all propose some kind of tax reform. However, once the new president is elected, Congress does not do anything because tax reform becomes the “third rail” to special interests who lobby for or against reforms that would affect them. The last comprehensive tax reform that Congress passed was the Tax Reform Act of 1986, more than a generation ago. Thus, we must pose the question: Is it possible for Congress to pass bi-partisan tax reform.

First, let’s separate fact from the rhetoric:

Rhetoric: Corporations play games to keep from paying their fair share of taxes.

Fact: Out of the 34 countries in the Organization for Economic Co-operation and Development (OECD), a group that includes most advanced, industrialized nations, America ranks first with a 39.1 percent corporate tax rate, compared to an OECD average of 24.1 percent. However, the effective rate for 2014 was 27.9 percent, which was second highest behind New Zealand among OECD countries and 15th-highest among the 189 countries measured. Effective tax rate takes into consideration the tax deductions allowed corporations to reduce the pool of taxable profits.

Some corporations aren’t paying their fair share of taxes because multinational corporations that have subsidiaries or divisions in other countries use legal accounting strategies to transfer profits to lower corporate tax rate countries or set up shell corporations in tax haven countries. This means that American corporations whose only facility is in the U. S. bear the brunt of our high taxes, making it more difficult for them to compete in the global marketplace.

One of the strategies used is what is called “Corporate inversion” by Investopedia, which refers to re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
How can we get these multinational corporations to pay their fair share of taxes in the United States?

Well, we can follow the example of states that have passed bi-partisan tax reform to address the problem of getting corporations to pay a fair share of taxes in their state. The solution was “apportionment” of corporate income taxes that is a share of taxes to be paid by a corporation to a state based on a particular formula. According to a Policy Brief by the Institute on Taxation and Economic Policy, all but the five states that don’t have a corporate income tax (Nevada, South Dakota, Texas, Washington, and Wyoming) have adopted some type of formula for state apportionment of corporate taxes.

  • “First, if a corporation does not conduct at least a minimal amount of business in a particular state, that state is not allowed to tax the corporation at all. Corporations that have sufficient contact in a state to be taxable are said to have “nexus” with that state.
  • Second, each state where a corporation has nexus must devise rules for dividing the corporation’s profits into an in-state portion and an out-of-state portion — a process known as “apportionment.” The state can then only tax the in-state portion.”

About half the states with a corporate income tax adopted the model legislation worked out in the 1950s, called the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA recommends the following three factors to determine the share of a corporation’s profits that can be taxed by a state:

  • “The percentage of a corporation’s nationwide property that is located in a state.
  • The percentage of a corporation’s nationwide sales made to residents of a state.
  • The percentage of a corporation’s nationwide payroll paid to residents of a state.”

Only two states use the percentage of property tax since local government jurisdictions already impose a property tax, and state governments don’t want to encourage corporations to relocate to other states by doubling up on property tax. Only eight states still use the unmodified formula, and many have moved to just sales. Most of the rest of the states have increased the weight on sales, and 18 states “double weight” the sales tax percentage.

One of our members of the Coalition for a Prosperous America, Bill Parks, is a passionate advocate of corporate tax reform at the federal level based on the Sales Factor Apportionment Framework. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserts that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explains that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”

For example, if a MNE’s share of worldwide sales in the United States is 40%, then the company would pay taxes on 40% of its sales. Mr. Parks states that the advantages of his plan are:

  • “Inversions [and transfer pricing] for tax purposes become pointless because the company would pay the same tax no matter what its base.
  • It would encourage exports because all exports are fully excluded from corporate income tax.
  • It simplifies the calculation for federal, state, and local taxes because the profit to be taxed by the U. S. is determined by a simple formula.
  • Reduces or eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment and U. S. tax revenue.
  • Ends the disguised income taxes which are actually royalty payments.
  • Allow Congress to raise revenue without raising rates because it stops U. S. and foreign multinationals from being able to place their profits offshore to avoid U. S. taxes.”

A couple of additional benefits listed at www.salesfactor.org are:

  • “Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
  • Maintaining Congress’ ability to lower rates and/or increase revenue.”

Bill concludes that “Sales Factor Apportionment is simpler and more effective than our current system which attempts ? and often fails ? to tax the worldwide business activities or U. S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game. Companies can easily move certain business operations and assets out of the U. S., but few, if any, would be willing to give up sales to the world’s largest market.”

Mr. Parks was part of my team visiting the offices of Congressional Representatives in Washington, D. C. the week of April 11th, and several Representatives appeared quite interested in the Sales Factor Apportionment tax proposal he described. Mr. Parks is the author of a much more in-depth article in the April 4, 2016 issue of Tax Notes (available only by subscription), and I am happy that he gave me permission to write about this topic for my audience. For further information, you may email him at Bill@nrs.com. You can also read the results of several studies on SFA at www.salesfactor.org.

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CPA’s Balanced Trade Message has Impact on Congress

April 27th, 2016

I just returned last Friday night from the Coalition for a Prosperous America‘s 9th annual Fly-In to Washington, D. C. It was my 4th time to participate with CPA members from across the country to meet with Congressional Representatives and/or their staff. I noticed a big difference in the reception we got during our visits compared to my first trip. The Coalition for a Prosperous America is a nonprofit organization representing the interests of 2.7 million households through our agricultural, manufacturing and labor members, and I’ve been a member since 2011.

In his report, CEO Michael Stumo wrote, “It was an amazing experience to finally have the wind at our backs instead of facing headwinds…CPA is taken very seriously by congressional offices. They trust what we say. One-fourth of our meetings included the congressman/woman themselves, which is significant and a new high for us. Senior staffers attended our meetings rather than junior staffers as was the case only a few years ago.”

However, we have not just been doing an annual visit to D. C. once a year since 2008. Teams of CPA members led by Michael Stumo have made visits to D. C. once or twice a month since January 2015. Here in California, teams of members led by me have visited the offices of 37 of the 53 Representatives from one to six times since 2013. In addition, CPA has co-hosted four manufacturing summits in California starting in 2013 ? two in San Diego, one in Orange County, and our recent one in Sacramento in February. The same kinds of activities have taken place in other states where CPA has a state chapter, such as Ohio, New York, and Pennsylvania.

In all of our visits, either in district or in D. C., we have constantly focused part of our message on simply establishing why our huge trade deficit not only matters, but is core to our national economic malaise. As I have written in past articles, our annual trade deficit over the past 20 years has a relationship to our national debt and is a major cause of the loss of 5.8 million manufacturing jobs and the nearly 95 million people that are no longer part of the workforce.

For years, we have been emphasizing the following:

  1. Trade deficits matter, they kill jobs and growth: This may sound obvious to you and me, but many Representatives and their staffer did not believe trade deficits mattered in the past. They were unwilling to admit the serious consequences in having a huge deficit in goods. So, if trade deficits were not a problem, there was no need to pursue a solution. Michael Stumo wrote, “This past week showed we have largely won that argument. We can only grow jobs and our economy if we focus upon a national strategy to balance trade by identifying the biggest trade cheating problems and aggressively fixing them.”

Our teams distributed a flyer titled, “Balanced Trade: Fighting the New Mercantilism” recommending that Congress establish a national goal to balance trade over a reasonable period of time by means of:

  • Direct trade negotiators to pursue trade deficit reduction as a primary negotiating objective.
  • Review past agreements for compliance with this objective. Renegotiate those that fail the test.
  • Utilize tax, fiscal and monetary policies to achieve the goal.
  • Aggressively and systematically attack and neutralize foreign mercantilism.
  1. Past trade agreements have not improved our trade performance: For years, we have heard this line from the establishment and Congressional Representatives: “Trade agreements establish American leadership, grow exports and create jobs.” The refrain was: “Trade is beneficial. We are increasing exports, and we have a surplus in services.” The only time I heard this refrain this year was by a legislative assistant in Senator Dianne Feinstein’s office.

We were able to trounce this argument this year by distributing a flyer that clearly showed the poor trade performance of our past agreements through visual aids CPA spent a lot of time developing (see below). We clearly showed that modern foreign mercantilism has moved beyond the tariff and non-tariff barrier provisions in trade deals. Indeed, those deals often made our trade problems worse. For example, our trade deficit with Korea has nearly doubled since it went into effect in 2012 (from $14.7 billion to $28.4 billion in 2015.)

The TPP will likely make America worse off: CPA read and digested the pro-TPP studies by Petri and Plummer, Peterson Institute for International Economics, Working Paper 16-2, Jan 2016 and the “Global Economic Prospects: Potential Macroeconomic Implications of the Trans-Pacific Partnership,” by the World Bank, Jan 2016. These reports tried to hide the problems and exaggerate gains. Our CPA teams distributed a flyer that “displayed the results through insightful infographics showing that any projected gains were embarrassingly meager and fundamentally implausible”[because] “The studies assume, without analysis, (a) no currency misalignment, (b) no foreign border taxes that replace tariffs, (c) no industrial subsidies and state-influenced enterprises, and (d) no mercantilism.” As Michael Stumo wrote, “These assumptions are untrue. Therefore, we cannot achieve the meager growth projected. We showed how those studies were built upon a series of demonstrably false assumptions to produce those meager gains. Then we showed why losses to American workers, industry and the economy were nearly certain when you eliminated the false assumptions.”


This year we also proposed tax reform that can fix some major foreign trade cheating on a large scale. As Michael Stumo, wrote, “Tax reform is a challenge because K Street lobbyists rig the game for special interests and no connection is made with our success in producing here and winning the international trade competition. However, we made significant gains in showing how we can fight foreign consumption taxes that act as tariffs by smartly adding a US consumption tax and funding the reduction of other regressive taxes and costs to fix the problem. We also showed how we can fix the corporate income tax system with sales factor apportionment to halt tax haven abuse by transnationals, incentivize US domestic production, and make foreign companies pay their fair share of income tax when selling into the lucrative American market.”

The good news is that everyone we saw seemed to agree that the TPP does not have the votes to pass before the election. The danger will be in the “Lame Duck” session. We seem to be in a far better position to prevent future passage than we were last year at this time with regard to passage of the “Fast Track” Trade Promotion Authority. Michael Stumo, wrote, “We almost beat Fast Track last June. Indeed we won the first votes in regulation time but lost in overtime when the Empire Struck Back. Now, it seems that the anti-Fast Track block is holding strong and quite a lot of pro-Fast Track congressional members have either declared opposition to TPP or are leaning against it.”

Michael added, “GOP House leadership pushed Fast Track through last year but they seem to view TPP as toxic now. The GOP rank and file are letting House leadership know they do not want to vote on TPP at any time in the foreseeable future. The Senate side is less solid and has always posed the bigger challenge. Senate majority leadership wants changes to TPP but still wants get to ‘yes.’ However, the changes being demanded are difficult (but perhaps not impossible) to deliver.”

We are being helped by the stand against trade agreements by two of the major presidential candidates, Trump and Sanders, who bring up our broken trade policy in almost every speech. “Trade has become one of the few, rare ‘voting issues’… an issue that actually moves voters to support or oppose a candidate.”

While this has been a several year battle, we haven’t won yet and still have a lot to do. The establishment will continue say that the voters simply don’t understand the “greater good.” Pundits will continue to write many “reasoned” articles about why the voters should support trade agreements such as the TPP. But the success of Trump and Sanders shows that the establishment has not only lost its clout, it is actively disbelieved by many now.

Help us to grow this movement and increase our effectiveness. Encourage your friends and colleagues to participate. Let’s keep up the good fight!

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How Could the Trans Pacific Partnership Affect you or your Business

April 19th, 2016

On February 4, 2016, President Obama signed the Trans Pacific Partnership Agreement on behalf of the United States. The TPP agreement has been in negotiation behind closed doors since 2010 between the United States and 11 other countries around the Pacific Rim: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TPP is a “docking agreement” so other countries could be added without the approval of Congress. India, China, and Korea have expressed interest in joining the TPP.

Our elected representatives in Congress had no involvement in writing the TPP – it was written by the staff of the U. S. Trade Representative office, with over 600 corporate advisors (think corporate lawyers) helping them write it. It contains more than 5,500 pages, and no member of Congress could view it as it was being negotiated until late 2014. Even then, they could not take any staff with them and were not allowed to take pen, pencil, paper, or a camera when they went to view it at the U. S. T. R.’s office.

The full text of the TPP was finally released to the public to review in November 2015, and it now awaits Congressional approval. According to the rules established by the Trade Promotion Authority (TPA) that passed Congress narrowly in June 2015, Congress will only be allowed 45 days for committee analysis after the bill is introduced, only 15 days after that is completed to bring it up for a floor vote, and only 20 hours of debate in the House and Senate. The TPA does not allow any amendments, filibuster, or cloture. Notice that the TPP is called an “Agreement,” as was NAFTA, CAFTA, KORUS, and every other trade deal in the past 22 years. The purpose for this is to get around the requirement of the two-thirds vote of the Senate to approve a Treaty that is required under Article 1, Section 8 of the Treaty clause in the U. S. Constitution. The TPP requires only a simple majority vote (50% + one.)

Supporters of the TPP say that it represents 40% of the world’s economic activity (GDP), but they fail to mention that the U. S. and its current trading partners represent 80% of that 40%. The other five countries represent the other 20%, with Japan alone being 17.7% of that total.

The current goal of trade agreements as given by Congress to the U.S.T.R is to “remove trade barriers,” such as tariffs, quotas, etc. and increase U. S. exports. The U. S. cut tariffs and opened our markets by means of these trade agreements. However, our trading partners didn’t really open their markets to us. They played another game ? mercantilism, featuring rampant global currency devaluation, consumption taxes called Value Added Taxes (VATs) that are tariffs by another name, massive subsidies to their industries, and industrial policies that favor their domestic supply chains.

In brief, the effect to the United States of this unbalanced trade has been:

  • Loss of >600,000 mfg. jobs from NAFTA
  • Loss of 3.2 million mfg. jobs between 2000 – 2010 from China’s entry into WTO
  • Loss of >60,000 mfg. jobs since Korea-US Agreement went into effect in 2012
  • Loss of an estimated 3.4 million U. S. service & call center jobs since 2000
  • Loss of an estimated 700,000 public sector jobs (2008-2013)
  • Racked up cumulative trade deficit of $12 trillion in goods (average $500 billion each year) since 1994

As a result, we now have the worst trade deficit in U. S. history, and we are off to even a higher deficit this year based on the trade figures released for January ($45.9 billion) and February ($47.1 billion). As a recent example of the effect of trade agreements on our total trade deficit, our trade deficit with Korea has nearly doubled in less than four years, increasing from $14.7 billion in 2012 to $28.4 billion in 2015. Proponents of KORUS promised that it would create 70,000 jobs and $10 billion in exports.

As mentioned in a previous article, proponents of the TPP aren’t even giving such rosy predictions. The Peterson Institute’s analysis of the TPP states: “…GDP is projected to fall slightly (-0.54 percent), employment to decline by 448,000 jobs…”

What are some of the ways the TPP could affect you or your business?

Buy American Act would essentially be made Null and Void: The worst effect would be to those businesses who sell to the government, whether it be local, state, or federal because under the TPP procurement chapter, the U.S. would have to agree to waive Buy America procurement policies for all companies operating in TPP countries. This means that all companies operating in any country signing the agreement would be provided access equal to domestic firms to bid on government procurement contracts at the local, state, and federal level. There are many companies that survived the recession and continue in business today because of the Buy American provisions for government procurement, especially defense and military. The TPP could be a deathblow for companies that rely on defense and military contracts. However, it would also affect procurement for infrastructure projects, such as bridges and freeways, as well as construction of local, state, or federal facilities.

Of course, this means that U. S. companies could bid on government procurement projects in TPP countries, but the trading benefit is miniscule. The U. S. government procurement market is 7X the size of current TPP partner countries (+550 billion vs. $55 -70 billion.) It is also highly unlikely that U. S. companies would be the low bidder against domestic companies in these TPP countries because of the vast difference in wages in countries such as Vietnam, where the average wage is 55 cents/hour. Past trade agreements has resulted in an average annual wage loss of 5.5% for full-time workers without college degrees, and U. S. wages have been stagnant for decades, growing by only about 2% per year since 2008. The result has been increased wage inequality from low to high wage earners.

Product Labeling could be Made Illegal: If you like to know if your food is safe, then you won’t like the fact that “Country of Origin,” “Non-GMO,” or “Organic” labeling could be viewed as a “barrier to trade” and thus be deemed illegal. According to Food & Water Watch, around 90% of the shrimp and catfish that Americans eat are imported. They warn, “The TPP will increase imports of potentially unsafe and minimally inspected fish and seafood products, exposing consumers to more and more dangerous seafood.” Many TPP countries are farm-raising seafood in polluted water using chemicals and antibiotics prohibited in the U. S. Farmed seafood from Malaysia, Vietnam, and China is being raised in water quality equivalent to U. S. sewers. Today, the FDA only inspects 2% of seafood, fruits and vegetables, and the USDA only inspects 4-5% of meat & poultry. Increased imports of food from TPP trading partners could swamp FDA and USDA inspections, so that even less is inspected.

TPP would Increase Immigration: If you are concerned about jobs for yourself or family members, then you won’t like the fact that the TPP increases “the number of L1 visas and the number of tourist visas, which can be used for business purposes.” Any service provider (phone service, security, engineers, lawyers, architects or any company providing a service) can enter into a TPP partner country and provide that service. Companies don’t have to hire Americans or pay American wages – they can bring in own workers and pay less than the American minimum wage.

TPP would Increase Job Losses in Key Industries: If you work in the automotive or textile industries, you may lose your job. The Center for Automotive Research projects a loss of 91,500 U. S. auto jobs to Japan with the reduction of 225,000 automobiles produced in the U. S. Also, the National Council of Textile Industries projects a loss of 522,000 jobs in the U. S. textile and related sectors to Vietnam.

TPP would Reduce Reshoring: Because TPP will reduce tariffs in trading partner countries, such as Vietnam, it will make the Total Cost of Ownership analysis to return manufacturing to America more difficult to justify. The high U. S. dollar has already diminished reshoring in the past year, so Harry Moser, Founder and President of the Reshoring Initiative, recently told me that “The combination of the high USD and TPP will reduce the rate of reshoring by an estimated 20 – 50%.”

Remember that the TPP is missing any provisions to address the mercantilist policies practiced by our trading partners: currency manipulation, Value Added Taxes that are both a hidden tariff and a hidden export subsidy, government subsidies/state owned enterprises, and “product dumping.”

 America is at a crossroads. We can either continue down the path of increasing trade deficits and increasing national debt by allowing anything mined, manufactured, grown, or serviced to be outsourced to countries with predatory trade policies. Or, we can forge a new path by developing and implementing a national strategy to win the international competition for good jobs, sustained economic growth and strong domestic supply chains. If you support the latter path, then add your voice to mine and millions of others in urging Congress not to approve the TPP in either the regular session before the Presidential election or the “lame duck” session after the election.

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What is the Heart and Soul of Manufacturing?

March 15th, 2016

Once in awhile you read a book that has such kernels of truth that they touch your soul. One such book is The Heart & Soul of Manufacturing by Bill Waddell that I just finished reading. The subtitle reveals the focus of his book: “How Lean Management aligns with the better angels of our nature to create extraordinary business results.”

I met Bill in 2014 when we were both speakers at the Lean Accounting Summit in Savannah, Georgia and reconnected with him at the summit in Jacksonville, Florida last year. I knew that we connected at a higher level because of his presentations and the topics we cover in our blogs, but reading his latest book confirmed it.

Bill has been a lean guru for more than 30 years, and in his Introduction, he writes this about his journey, “During the time I have grown in my own thinking from seeing lean as an exciting new set of tools to use on the factory floor and in the supply chain, to an all-encompassing business and economic model, to what it truly is: All of the above driven by and centered on a powerful and rare organizational culture.”

My own lean journey has been much shorter ? only 10 years since I attended my first workshop about lean in 2006, but it was preceded by getting my certificate in Total Quality Management in 1993. By the end of the 1990s, I had discerned that TQM failed because it started from the bottom up with “Quality circles” and was not adopted as a philosophy or incorporated into the corporate culture by C-level management.

I began my lean journey with the viewpoint that the adoption and implementation of lean tools and principles would help American companies be more competitive in the global marketplace and play a role in “saving” American manufacturing as expressed in my book published in 2009.

When I read Bill’s book, I resonated with his statement, “The cut throat world of business, and especially manufacturing over the last thirty years, has become centered on the negative: laying off good people in pursuit of lower headcounts, closing plants and moving the work to China, decimating entire small towns across America, and bankrupting small suppliers by abruptly terminating long relationships and replacing them with cheaper foreign sources.” These facts are what motivated me to write my book, Can American Manufacturing be Saved? Why we should and how we can.

The understanding of the importance of the total transformation of the culture of a company was revealed to me when I took classes in 2014 from Luis Socconini of the Lean Six Sigma Institute to acquire my Yellow Belt in Lean Six Sigma and thereafter read his book, Lean Company.

After years of applying the Toyota Production System tools and principles in his consulting, Bill dug deeper into the precepts behind them to understand what enables “Toyota with its nearly perfect track record of providing lifetime employment to its workers ? and making a lot of money at the same time.” One of the five precepts that more Americans need to emulate is “Be contributive to the development and welfare of the country by working together, regardless of position, in faithfully fulfilling our duties.”

Bill realized that there are other people like him “who want to do their jobs well, but also want to treat people well…they want to have a positive impact on the world around them and especially on the people around them.” The purpose of his “book is to send the message to those people that it is possible to do both…it provides a path for good people to combine the crafts of their trade with their moral code, to be good manufacturers because they are good people, rather than feeling they must either be good manufacturers or good people.”

Bill’s book features in depth consideration of companies that are every bit Toyota’s equal in their people-centered culture: ATC Trailers, Barry-Wehmiller, and West Paw Design.

Bill states that a lean culture is more than a “feel good culture;” it must be “a driver for a completely different way of running the business.” It must be based on “servant leadership,” wherein “the servant leader is always asking, ‘How can I help?’ Leadership and management exist to enable the folks on the front lines to better serve customers.”

Bill writes, “Eliminating waste and empowering people intersect beautifully.” But, in the goal to eliminate waste, “The resources that are the most important to eliminate wasting are people’s time and talents.” He adds, “Traditional management sees human beings as little more than unique tools, while lean thinkers see people as the very heart and soul of the organization’s reason for existence.” And, “In a lean company letting a thinking, feeling, growing person go ? laying them off ? is a shameful waste of a resource that is both precious and has enormous economic value.”

Those familiar with lean will understand his emphasis in a subsequent chapter on organizing a company by value streams, which engenders the feeling that “we’re all in this together” in the “shared commitment to the common good.” In a company with a lean culture, “success is defined by how the team performs along the entire end-to-end value stream…Rather than pit people against each other for individual recognition, lean incentivizes people to help each other, and to do whatever they can to make the other folks on the team more capable, to enable them to bring more of their talents to bear on the job.”

In chapter 5, “It’s all about Growth,” he writes, “There is a widespread misconception that lean is a strategy for reducing costs by eliminating waste. Quite to the contrary, lean is an engine for growth. The purpose of waste reduction and ideally elimination is to free up capacity.” When you free up capacity, you can grow, produce more, and make more profits. As Bill writes, “no company has ever cut its way to success…Success can only come from more, and you can’t cut your way to more.”

In chapter 6, “Hard Core Culture,” Bill discusses what is meant by a lean culture in contrast to “the traditional culture of blame, and its companion – arrogance…that causes most companies to fail from the inside out.” While a lean culture eliminates blame to utilize the Deming Cycle of Plan, Do, Check, Act (PDCA), Bill states, “The core concept of respect for people is not just theoretical or philosophical respect based on the belief that we are all children of God and equal in His eyes. It is professional respect, as well…based on the knowledge that no one knows everything about a process or an operation, but everyone involved knows something.”

Chapter 7, “Accounting,” contains Bill’s easy to understand explanation of “the important aspects of lean accounting, and how they support the decisions a principled, faith driven manager…” Lean accounting measures costs “based on cross functional value streams, rather than in each functional silo. It is based on “real money…it largely does away with the various types of cost types typically assigned to them…Standard costs are done away with in lean.”

I became a big proponent of lean accounting after a four-hour module in my Yellow Belt class that was reinforced when I attended sessions at the Lean Accounting summits of 2014 and 2015.

In chapter 8, Bill recounts the horrific story of the Triangle Shirtwaist factory fire that I recounted in my own book, wherein 145 women workers died in a fire because the doors were locked so the women couldn’t get out via the stairs, three of the four elevators weren’t working, and the owners had not installed a sprinkler system. It was the worst industrial incident in American history. It shocked the country and “it set off a series of laws and changes in industrial safety that eventually put an end to sweatshops in the United States.”

Bill then recounts the stories of two equally or more horrific tragedies that occurred in 2012 and 2013 offshore: Tazreen Fashions factory fire in Bangladesh where 117 women died in a fire because of locked doors and no fire prevention system and the Rana Plaza factory building collapse killing more than 1,200 people. He comments, “Since NAFTA was enacted some twenty or more years ago there has been a flurry of global trade agreements that typically pay little more than lip service to moral and ethical issues…These same trade agreements have had the effect of causing American environmental regulations to be something of a sham…great swaths of American manufacturing has moved to places such as China and Vietnam where there has been little or no environmental concern.”

We have actually been outsourcing our pollution to primarily China or Mexico. There is no sky-high fence to keep the air from crossing our border with Mexico, so we are breathing the polluted air being generated by companies in Mexico. In addition, the horrifically polluted air from China is actually coming to the U. S. on the trade winds.

The rest of the chapter 8 is a rather lengthy discussion of the differences between a privately owned vs. a publicly owned company with regard to practicing moral principles in the conduct of business.

Chapter 9 focuses on people, as “lean is a completely people centered business theory… lean management assumes the best and is based on empowerment and trust.” A culture of lean eliminates the conflict between management and labor. He presents examples of the “talent development” aspect of lean and now some companies evaluate people on the basis on their skills and knowledge in a four-square quadrant for both compensation and leadership. He concludes, “The companies with the best people working together on the best teams are the winners, and putting the best people into the best teams is done by principled leaders, not on the basis of accounting parameters.”

Chapter 10 considers “A Few Specifics,” and one of them that flies in the face of modern technology is the elimination of ERP systems as lean companies “see big IT systems as creators of significant levels of non-value adding waste. ERP systems create the need for planners, production schedulers, cost accountants and buyers. They require data collection and entry, as well as supervisors to oversee all of this, along with the costs of the software and hardware itself.” He provides examples of how ATC and West Paw Design use much simpler systems based on kanban (“a Japanese term mean something like ‘display card'”) He explains “Lean companies operate on a demand pull basis, rather than sophisticated forecasting models. Under this approach, they set a minimal inventory level in place and their purchasing and producing simply replenish that which has been used to meet actual customer demand…”

He concludes, “Perhaps the biggest reason lean companies avoid systems such as ERP is their cultural aversion to complexity. Complexity is the enemy of short cycle time, and it is the enemy of continuous improvement.”

The final two chapters contain a plea to take action and start leaning. He states, “You can’t change the basic trajectory of the business unless you change how you manage it…The gut wrenching, radical transformation in the business is not on the shop floor ? it is in the management office.” He states that successful lean leaders don’t come to this enlightened approach to management through logic, “they come to it through their principles…a principled leader is not content with the basic shop floor tools…they delve deeper and deeper into lean to find the zone of the management structures and philosophies need to allow them to manage by their principles and they dive even deeper into the core of lean culture until they fully understand and support the cultural rules need to turn the whole company into one driven by the leader’s strongly held beliefs.” He encourages companies to “learn why a strong culture is the linchpin of Lean success.”

The kernels of truth I briefly highlighted herein are why I recommend this book to everyone who wants to live and work by his higher principles while achieving greater success. If more American companies had the type of lean culture that Bill envisions, we truly could rebuild our manufacturing industry to make America great again and create jobs for millions of out of work Americans.

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CPA Criticizes Peterson Report on Trans Pacific Partnership Agreement

March 13th, 2016

On January 25, 2016, the Peterson Institute for International Economics (PIIE) released a report  on the Trans-Pacific Partnership trade agreement. The Coalition for a Prosperous America (CPA) promptly released their commentary on the Peterson Institute report the same day, which was based on oral and written testimony CEO Michael Stumo had given to the U. S. International Trade Commission on January   15, 2016.

The Peterson Institute used the “”computable general equilibrium (CGE) model.” I’m not an economist. I live and work in the real world of manufacturing. Thus, I am not familiar with some of the terms economists use for economic models, and had not heard of this term previously. I try to find explanations that make sense, but even the Wikipedia definition was complex; “A CGE model consists of (a) equations describing model variables and (b) a database (usually very detailed) consistent with the model equations… CGE models are useful whenever we wish to estimate the effect of changes in one part of the economy upon the rest. For example, a tax on flour might affect bread prices, the CPI, and hence perhaps wages and employment. They have been used widely to analyse trade policy.”

The World Bank states, “Computable General Equilibrium (CGE) models offer a comprehensive way of modeling the overall impact of policy changes on the economy… However, CGEs are significantly affected by the assumptions that they are based on which, depending on their definition, can impact on the results.”

CPA criticized the PIIE for using “the controversial computable general equilibrium (CGE) model to analyze the TPP rather than models that produce less optimistic results.” Stumo stated that the CGE model is increasingly recognized as unreliable because:

Untrue Facts Assumed ? “full employment always exists, trade is in balance, that wages and productivity stay in alignment rather than diverge, and that all countries have perfectly free markets with rational economic behavior.” These assumptions are false ? “full employment rarely exists; trade is almost never in balance; wages have diverged downward from productivity for the past several decades; and many TPP countries have state-directed capitalism or strong industrial policies to influence and alter market outcomes.”

Untrue Past Results ? The CGE model was used to analyze China’s being granted Permanent Normalized Trade Relations with China (China PNTR) in 2000 and the Korea-U. S. trade (KORUS) agreement in 2012. A reduction in the trade deficits were predicted for both countries, but the reality is that U. S. trade deficit with China increased from $68.7 billion in 1999 to $337 billion in 2015, and the Korea trade “deficit worsened by $12 billion annually between 2012 (date of KORUS implementation) to 2015.” (US Census Bureau)

Untrue Assumption of No Net Job Losses? “The CGE model wrongly assumes that there are no job losses to produce its results. The International Trade Administration assumes that for every billion dollars of U.S. exports supported 5,796 jobs, down from 7,117 jobs per billion dollars of U.S. exports in 2009. Conversely, every billion dollars of imports has the opposite result. Thus, where trade agreements result in worsening trade deficits, as is the case for the NAFTA, Korea and China PNTR deals, the job losses are drastic.”

Additionally, Stumo criticized the Peterson report because it ignores the fact the Trans Pacific Partnership Agreement does not address problems with currency misalignment, border taxes (VATs), and industrial policies, such as state-owned enterprises and government subsidies.

Stumo stated, “The PIIE model incorrectly assumes that currency valuations will be set by the perfectly free market and will not be manipulated. It does not take into account rising foreign value added taxes – which replace tariffs – charged to imports from the US.  It also ignores the industrial policy and state-directed strategies that Japan, Vietnam and others use to give an advantage to state-influenced or national champion domestic industries.”

Stumo criticized the fact that PIIE admits the TPP will create no new jobs and little growth even if the CGE model’s conclusions are true.

Job Creation Will Not Occur ? “…while the TPP is not likely to affect overall employment in the United States, it will involve adjustment costs as US workers and capital move from less to more productive firms and industries. Section 4 estimates that 53,700 US jobs will be affected—i.e., that number is both eliminated in less productive import-competing firms and added in exporting and other expanding firms—in each year during implementation of the TPP. This kind of movement between jobs and industries is what economists refer to as “churn,” and most kinds of productivity growth cannot occur without it taking place. For perspective, 55.5 million American workers changed jobs in this way in 2014—so the transition effects of the TPP would represent only less than 0.1 percent increase in labor market churn in a typical year. Most workers who lose jobs do find alternative employment, but workers in specific locations, industries, or with skill shortages may experience serious transition costs including lasting wage cuts.”

The Peterson report even admits job loss from past trade agreements, stating “The largest loser is the United States, whose trade and current account deficits have been $200 billion to $500 billion per year larger as a result. The United States has thus suffered 1 million to 5 million job losses.

The reality is that we lost 6.2 million manufacturing million jobs in the past 20 years as a result of NAFTA, China’s being granted PNTR in 1999, and the subsequent trade agreements with Central America, Korea, and other countries. Since manufacturing jobs create three to four other supporting or related jobs, we really lost 18 – 20 million jobs, which partly explains why 94,610,000 Americans are no longer in the labor force, which is the lowest participation rate in 38 years.

What do the report’s authors mean by “import-competing firms”? It appears to me that this means American manufacturing firms whose domestically-made products compete with imports for market share in the U. S. In addition, the Made in USA products are also competing as exports to other countries against the exports of China, Korea, our other trading and non-trading partners. So what guarantee do we have that the people losing jobs at import-competing firms will find jobs at exporting companies? None!

In addition, the CPA commentary highlighted the following:

Income gains are Negligible ? “The study projects that, by 2020, US incomes will rise a mere 0.1% of GDP. (Table 2).  This means that 99.9% of growth will happen without regard to the TPP.  The number 0.1% is equivalent to, or less than, a rounding error. It can only come true if all untrue assumptions in the CGE model are true. It will take another 10 years for the optimistic projection to deliver a meager 0.5% income gain by 2030.”

Middle Class Will Not Benefit ?  “Assuming (which we do not) the small income gains are realized, the study is silent on who benefits from them. The Economic Policy Institute reported that trade agreements account for 90% of wage inequality. If there are any income gains, the middle class will be a net loser.”

Other countries will “benefit” more than the US ? “The Peterson Study projects that Japan, Malaysia and Vietnam will gain far more than the United States.  The US Trade Representative, by pushing the TPP, is helping open markets for competitors in Japan and other countries. Japan is estimated to gain five times more income (in relation to GDP) than the US, Vietnam 16 times more, and Malaysia 15 times more. (Report, Table 2).”

Finally, the CPA commentary points out that other economic models show losses to the U.S. and other TPP countries. The commentary cites the fact that scholars at the Global Development And Environment Institute of Tufts University released a working paper in January 2016 that used the United Nations Global Policy Model (GPM). The Executive Summary of this paper states, “This GDAE Working Paper employs a more realistic model that incorporates effects on employment excluded from prior TPP modeling. We find that any benefits to economic growth are more limited, and even negative in some countries such as the United States. More importantly, we find that TPP would lead to losses in employment and increases in inequality. This is particularly true for the United States, where GDP is projected to fall slightly (-0.54 percent), employment to decline by 448,000 jobs, and inequality to increase as labor’s share of income falls by 1.31 percent.”

The paper states that the job loss would not be limited to the U. S, stating, The TPP would lead to employment losses in all countries, totaling 771,000 lost jobs…Participating developing economies would also suffer employment losses, as greater competitive pressures force them to limit labor incomes and increase production for export.”

In fact, it also states that job losses would not be limited to TPP trading partners: “The TPP would lead to losses in GDP and employment in non-TPP countries. In large part, the loss in GDP (-3.77 percent) and employment (879,000) among non-TPP developed countries would be due to losses in Europe, while developing country losses in GDP (-5.24%) and employment (-4.45 million) would reflect possible losses in China and India.”

The CPA commentary concludes that “the PIIE report as revealing the lack of any economic benefit from the TPP under the most optimistic, albeit implausible, circumstances. It is more likely that job destruction and industry shrinkage will continue being the net result.”

I will be even more emphatic in my predictions if the TPP is approved by Congress. The TPP will result in millions of job losses since past predictions were always exceeded. It will be another nail in the coffin of American manufacturing. The TPP is so overreaching in its scope that it would change many aspects of American life. I’ve written several previous articles posted on the blog section of my website under “trade” on the dangers of the TPP and why we must stop it from being approved by Congress. Do your own research and don’t be fooled by the rhetoric of its supporters. You can read the full text of the agreement for yourself here.

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What Could be done about China’s Theft of Intellectual Property

March 13th, 2016

Hardly a week goes by without a report of Chinese “hacking” or Intellectual Property Theft, so it was no surprise that a published analysis by CrowdStrike, a California-based cyber security company, revealed that China violated its cyber agreement with the United States the very next day after CNBC reported that President Obama and China’s President Xi Jinping agreed to not conduct cyber theft of intellectual property on Friday, September 25, 2015. President Obama said. “The United States government does not engage in cyber economic espionage for commercial gain, and today I can announce that our two countries have reached a common understanding on a way forward.” However, the U.S.-China agreement “does not prohibit cyber spying for national security purposes.”

It is interesting to note that the day before the announcement, September 24, 2015, Chet Nagle, a former CIA agent and current Vice President of M-CAM, penned an article in the Daily Caller, stating, “At FBI headquarters in July, the head of FBI counterintelligence, Randall Coleman, said there has been a 53 percent increase in the theft of American trade secrets, thefts that have cost hundreds of billions of dollars in the past year. In an FBI survey of 165 private companies, half of them said they were victims of economic espionage or theft of trade secrets — 95 percent of those cases involved individuals associated with the Chinese government.”

He blamed the corruption of Chinese government officials for the problem and stated that “President Xi Jinping has instituted a strict anti-corruption campaign. Regrettably, the campaign has focused on “tigers” — senior government officials — at the expense of eliminating the rampant corruption by the “flies” — officials at the provincial and local level. In any event, putting a dollar value on direct corruption does not address the totality of the costs. Business confidence and foreign direct investment in China are already falling because of the absence of the rule of law.”

He concluded, “China’s disregard of the rule of law should be the underlying driver for all discussions of commercial topics during the coming visit of China’s president. Lack of the rule of law is the most difficult challenge American enterprises face in China.”

In researching this topic, I found out that three years earlier, May 22, 2013, the bipartisan Commission on the Theft of American Intellectual Property of the U.S. International Trade Commission released a report. Dennis C. Blair, former Director of National Intelligence and Commander in Chief of the U.S. Pacific Command, and Jon M. Huntsman, Jr., former Ambassador to China, Governor of the state of Utah, and Deputy U.S. Trade Representative, were the Co-chairs of the Commission.

The day after the release, Forbes published an article about the report, stating that “China accounts for at least half – and maybe as much as 80 percent – of U.S. intellectual property theft.” The article briefly discussed the problem of China’s Intellectual Property theft and included quotes from the co-chairs, but did not go into any detail about the recommendations of the Commission.

The article did provide the link to the 100-page report, which I have since read. In view of the continuing problem, it is time to reconsider the key findings of the report, titled, “The Impact of International IP Theft on the American Economy”:

  • ”Hundreds of billions of dollars per year. The annual losses are likely to be comparable to the current annual level of U.S. exports to Asia—over $300 billion…”
  • Millions of jobs. If IP were to receive the same protection overseas that it does here, the American economy would add millions of jobs.
  • A drag on U.S. GDP growth. Better protection of IP would encourage significantly more R&D investment and economic growth.
  • The incentive to innovate drives productivity growth and the advancements that improve the quality of life. The threat of IP theft diminishes that incentive.

The report stated, “A core component of China’s successful growth strategy is acquiring science and technology. It does this in part by legal means—imports, foreign domestic investment, licensing, and joint ventures—but also by means that are illegal. National industrial policy goals in China encourage IP theft, and an extraordinary number of Chinese in business and government entities are engaged in this practice.”

The report stated that existing remedies are not keeping up with the problem because of:

  • Short product life cycles – “the slow pace of legal remedies for IP infringement does not meet the needs of companies whose products have rapid product life and profit cycles.”
  • Inadequate institutional capacity ? a shortage of trained judges in developing countries
  • China’s approach to IPR is evolving too slowly – “improvements over the years have not produced meaningful protection for American IP.”
  • Limitations in trade agreements? there are also significant problems in the WTO process that have made it impossible to obtain effective resolutions. “Bilateral and regional free trade agreements are not a panacea either.”
  • Steps undertaken by Congress and the administration are inadequate.

The Commission recommended short-term, medium-term, and long-term remedies. The short-term measures are immediate actions that are largely regulatory or made effective via executive order and include the following:

  • Designate the national security advisor as the principal policy coordinator for all actions on the protection of American IP.
  • Provide statutory responsibility and authority to the secretary of commerce to serve as the principal official to manage all aspects of IP protection.
  • Strengthen the International Trade Commission’s 337 process to sequester goods containing stolen IP.
  • Empower the secretary of the treasury, on the recommendation of the secretary of commerce, to deny the use of the American banking system to foreign companies that repeatedly use or benefit from the theft of American IP.
  • Increase Department of Justice and Federal Bureau of Investigation resources to investigate and prosecute cases of trade-secret theft, especially those enabled by cyber means.
  • Consider the degree of protection afforded to American companies’ IP a criterion for approving major foreign investments in the United States under the Committee on Foreign Investment in the U.S. (CFIUS) process.
  • Enforce strict supply-chain accountability for the U.S. government.
  • Require the Securities and Exchange Commission to judge whether companies’ use of stolen IP is a material condition that ought to be publicly reported.
  • Enforce strict supply-chain accountability for acquisitions by U.S. government departments and agencies by June 1, 2014, and work to enhance corporate accountability for the IP integrity of the supply chain.

The Commission made the following medium term recommendations to build a more sustainable legal framework to protect American IP that Congress and the administration should take:

  • Amend the Economic Espionage Act (EEA) to provide a federal private right of action for trade-secret theft. If companies or individuals can sue for damages due to the theft of IP, especially trade secrets, this will both punish bad behavior and deter future theft.
  • Make the Court of Appeals for the Federal Circuit (CAFC) the appellate court for all actions under the EEA. The CAFC is the appellate court for all International Trade Commission cases and has accumulated the most expertise of any appellate court on IP issues. It is thus in the best position to serve as the appellate court for all matters under the EEA.
  • Instruct the Federal Trade Commission (FTC) to obtain meaningful sanctions against foreign companies using stolen IP. Having demonstrated that foreign companies have stolen IP, the FTC can take sanctions against those companies.
  • Strengthen American diplomatic priorities in the protection of American IP. American ambassadors ought to be assessed on protecting intellectual property, as they are now assessed on promoting trade and exports. Raising the rank of IP attachés in countries in which theft is the most serious enhances their ability to protect American IP.

The more idealistic long-term recommendations are:

  • Build institutions in priority countries that contribute toward a “rule of law” environment in ways that protect IP.
  • Develop a program that encourages technological innovation to improve the ability to detect counterfeit goods.
  • Ensure that top U.S. officials from all agencies push to move China, in particular, beyond a policy of indigenous innovation toward becoming a self-innovating economy.
  • Develop IP “centers of excellence” on a regional basis within China and other priority countries.
  • Establish in the private, nonprofit sector an assessment or rating system of levels of IP legal protection, beginning in China but extending to other countries as well.

Of particular interest is the mention in the report that an annual survey in late 2012 of member companies of the American Chamber of Commerce in the People’s Republic of China “over 40% of respondents reported that the risk of data breach to their operations in China is increasing, and those who indicated that IP infringement has resulted in “material damage” to China operations or global operations increased from 18% in 2010 to 48% in 2012,” and that “The longer the supply line, the more vulnerable it is to IP theft.”

The risk of Intellectual Property is one of the major reasons many companies are returning manufacturing to America through reshoring. This is also why I urge the inventors that are part of the San Diego Inventors Forum to avoid going to China if at all possible, and if they have to go to China to meet their target Bill of Material cost, they should never source all of the parts of their product with one vendor. Otherwise, they are at risk of being victimized by their Chinese vendor stealing their IP and getting a counterfeit version of their product on the market first.

In conclusion, “The Commission considered three additional ideas for protecting the intellectual property of American companies that it does not recommend at this time.” The following one of the three is particularly interesting to me because of the enormous trade deficits we have with China:

“Recommend that Congress and the administration impose a tariff on all Chinese-origin imports, designed to raise 150% of all U.S. losses from Chinese IP theft in the previous year, as estimated by the secretary of commerce. This tariff would be subject to modification by the president on national security grounds.”

“The Commission is not prepared to make such a recommendation now because of the difficulty of estimating the value of stolen IP, the difficulty of identifying the appropriate imports, and the many legal questions raised by such an action under the United States’ WTO obligations. If major IP theft continues or increases, however, the proposal should be further refined and considered.”

What is outrageous to me is that it is obvious to me that none of the short-term, medium-term or long-term recommendations have been implemented or we would not still have the serious problem of cyber espionage and Intellectual Property Theft three years later.

Supporters of developments in China “essentially argue that when China begins producing its own intellectual property in significant quantities, the country’s own entrepreneurs and inventors will put pressure on political and Communist Party leaders to change the laws and improve IP protections.” Since China has the stated goal of becoming the superpower of the 21st Century and is Intellectual Property Theft is one of their tools to achieve this goal, I do not feel that this will ever happen.

To me, the most important conclusion of the report is “If the United States continues on its current path, with the incentives eroding, innovation will decline and our economy will stagnate. In this fundamental sense, IP theft is now a national security issue.” It will be interesting to see if the next president and the next Congress we elect will have the courage to play hardball with China by implementing some of the recommendations of the Commission.

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